The first rule of tapering is don’t talk about tapering anytime soon.
Federal Reserve policy makers probably think the prospects for the economy in 2021 look significantly better than they did when they gathered mid-December. For now, though, the economy is facing the surge in Covid-19 cases that began last fall, along with the related stepped up caution and restrictions. Following their two-day meeting Wednesday, they focused on the downside.
They noted in their post-meeting statement that the recovery in the economy and job market has slowed. They again committed to keeping rates near zero until the labor market is tight and inflation has obviously cleared its 2% target rate, and to keep buying $80 billion in Treasurys and $40 billion in mortgage bonds per month “until substantial further progress” has been made toward those goals.
Yet though the economy has weakened in recent months, economists have been raising their growth forecasts. Following the Fed’s December meeting, for example, economists at
reckoned that in the fourth-quarter of 2021, gross domestic product would be 3.4% above its year-earlier level. Since then, they have raised that forecast to 5.4%.
There are multiple forces driving the improved outlook. First, there is the Covid-19 relief package that was passed late last year. Its extension of jobless benefits, renewed support for small businesses and the direct payments it provided to many Americans assuaged concerns that GDP might actually contract in the first quarter relative to the fourth. Second, with Democrats gaining control of the Senate, another round of fiscal support is looking likely in the months ahead. Throw in expectations that enough people will be vaccinated for life to take on some semblance of normal later this year, and things start looking pretty rosy.
Forecasts are only forecasts, however, and with so much that could go wrong, including vaccine-supply problems and pernicious virus mutations, the Fed needs to be careful about sounding optimistic, particularly since doing so could do some damage.
The Fed can’t forget the paroxysms markets went into in 2013 when it signaled it planned to start tapering its asset purchases. The central bank figured this wouldn’t be hard for the market to swallow—it would only be buying fewer bonds, so the effect, in an analogy used by then Fed Chairman
would be more like easing up on the gas pedal than tapping on the breaks. Yet long-term rates shot higher on the taper talk, with the yield on the 10-year Treasury rising from less than 2% to nearly 3% in a matter of months. That weighed on markets and the economy, and the Fed had to push back its tapering plans.
In his post-meeting press conference Wednesday, Fed Chairman
said the central bank isn’t close to countenancing tapering yet, and that when it is ready to talk about it, it will do so well in advance of “a pretty gradual taper.” It is an easy thing to say now, but if in the months ahead things really start looking better, figuring out how to get its taper messaging right could be one of the Fed’s biggest challenges.
Write to Justin Lahart at [email protected]
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the January 28, 2021, print edition as ‘Fed Needs a Poker Face to Avoid Taper Tell.’